Mark Cuban is a wealthy man. He also pays a lot of income tax. According to a recent post on the social platform X, the Texas-based entrepreneur wired the IRS the hefty sum of $275.9 million in federal income taxes for the 2023 tax year.
The post didn’t specify how much of Cuban’s tax bill resulted from the sale of his majority stake in the Dallas Mavericks professional basketball team, though he acknowledged to CNBC that “almost all” of his taxable income consisted of long-term capital gains. That kind of income profile is typical for high-net-worth individuals like Cuban. His personal fortune is estimated at $5.4 billion.
The thing that caught my eye about Cuban’s social media comments wasn’t the size of his tax bill, but his attitude about forking over that much money to the IRS. He projected a sense of pride:
Hey Mark just wondering if you or your corporations pay more than the required taxes in order to pay your fair share, thanks so much. [Ian Miller, @ianmSC, Apr. 13, 2024.]
I pay what I owe. . . . This country has done so much for me, I’m proud to pay my taxes every single year. Tag a former president that you know doesn’t. [Mark Cuban, @mcuban, Apr. 14, 2024.]
The following day:
Do I expect all of it to be used wisely? Of course not. But I’m still proud to be able to give back to our country. I’ve said it for years. After military service, paying your taxes is the most patriotic thing we can do. [Mark Cuban, @mcuban, Apr. 15, 2024.]
Scrolling through the comments on Cuban’s X feed, several people accused him of “virtue signaling” — loosely defined as the act of calling attention to one’s own good deeds as a form of subtle self-promotion. That strikes me as a peculiar criticism. It assumes that gestures of kindness or charity are more genuine when delivered in such a manner that few people notice them. At any rate, Cuban’s tax payments — like yours and mine — certainly aren’t acts of benevolence. They are no less than what the law requires.
I mention these tax comments for the sake of contrast. Another billionaire was in the news recently for reasons that relate to taxation, though it’s doubtful he will be accused of much virtue. The man known internationally as “Bitcoin
Bitcoin
This is far cry from the Jesus born in Bethlehem who once said that it was easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of God. Bitcoin Jesus was born in San Jose, California, in 1979, became fabulously wealthy from his cryptocurrency holdings, and renounced his U.S. citizenship in 2014.
In case you’re not in the loop, allow me to explain. Bitcoin Jesus is the alias of noted libertarian investor Roger Keith Ver. He has resided in Japan for much of his adult life and now claims citizenship in St. Kitts and Nevis. As you might expect, the combination of global mobility and extreme wealth can lead to some interesting tax issues.
Ecce Homo
Some people got into bitcoin because of speculative ambitions and nothing more. They do not necessarily believe that an alternate currency — intentionally decoupled from the realm of central banks — fosters emancipation of the human spirit.
Some other folks got into it because they were math geeks as teenagers and later became impressed with the formative cryptocurrency “white paper” by Satoshi Nakamoto, the mysterious bitcoin architect.
Still others got into bitcoin as a form of political protest. Their investment preferences are flavored by a deep distrust of the U.S. federal government and the Federal Reserve Board in particular. They view all monetary policy as institutionalized state oppression; some of them want to revert to the gold standard.
Ver probably has a foot in each of these camps, but his reputation aligns most closely with the latter group. His animus isn’t reserved for the Fed. It’s clear from videos Ver has posted on social media that he isn’t a fan of the IRS. One video is titled “Taxation is Theft” and is a two-minute compilation of gun-wielding federal agents kicking down doors in pursuit of who knows what. The visual assault on our senses concludes with a pitch for the website bitcoincash.com — one of Ver’s side projects. The money changers have left the temple and moved on to the internet.
As for his backstory, Ver encountered some problems with the law early in his career. After graduating from high school, he attended college for one year (De Anza College) before dropping out to pursue various business interests. Those ventures included selling fireworks on eBay, which is not a good idea. In 2001 he was charged with one count of dealing in explosives without a license, one count of illegally storing explosive devices, and one count of mailing injurious articles. The prosecution stemmed from an investigation carried out by the Bureau of Alcohol, Tobacco, and Firearms. He pleaded guilty in 2002 and was sentenced to 10 months in jail.
After that, Ver relocated to Japan. He eventually became something of a techie, owning two businesses — Memorydealers and Agilestar — that sold computers and networking equipment. Both businesses were based in Santa Clara, California, and organized as S corporations with Ver as their sole shareholder. Sometime around 2011 Ver began acquiring bitcoins, both for himself and his two companies. He also took steps to publicly promote bitcoin. It was around that time he acquired the nickname Bitcoin Jesus. It’s a truism that anyone who has invested in a cryptocurrency wants others to do the same. Stoking demand drives up the unit price.
The value of bitcoin increased dramatically in the years that followed, and Ver became richer and richer. One of his companies (Memorydealers) used bitcoin in its commercial operations, as a means of paying vendors and accepting payments from customers. It also began conducting business under the name bitcoinstore.com.
In 2012, Ver engaged a law firm to advise him on the formalities of expatriation and renouncing his U.S. citizenship. The renunciation of citizenship would require the surrender of his U.S. passport, which creates a problem for anyone who intends to travel internationally. The challenge was to obtain new citizenship elsewhere with minimal fuss. There is no record of Ver seeking Japanese citizenship. Had he done so, it’s possible his prior conviction might have proven an obstacle. As a general rule, most countries are careful about to whom they grant citizenship.
Ver’s consultations included detailed discussions of the exit tax of section 877A. As a covered expatriate, his assets would be subject to a deemed sale at fair market value occurring the day before his designated expatriation date. Covered expatriates are also required to file Form 8854 (“Initial and Annual Expatriation Statement”), in which they certify their compliance with federal tax obligations for each of the five years before their expatriation. Form 8854 further requires disclosure of the expatriate’s net worth, assets, income, and liabilities. To that end, the law firm advised Ver to retain a professional appraiser to determine the value of his two companies.
On February 4, 2014, Ver became a citizen of St. Kitts and Nevis, allowing him to travel freely under a Kittitian passport. It’s unclear how long he resided in St. Kitts and Nevis, if at all, as a precondition of being granted citizenship. The practice of governments selling so-called golden passports to affluent foreigners is a thriving cottage industry.
A quick internet search of the phrase “St. Kitts Golden Passport” leads to several consultancy websites claiming that a Kittitian passport can be obtained in as little as 90 days in exchange for a minimum investment of $250,000 in the country’s sustainable growth fund, or a minimum investment of $400,000 in an approved real estate asset. That’s chump change compared to the investment required by Malta, which offers its passport holders the benefits of EU citizenship. St. Kitts and Nevis can’t offer that, though it has an arrangement with the Schengen Area that allows its passport holders visa-free access to the EU bloc for up to 90 days. It’s unclear whether Ver took advantage of the country’s citizenship-by-investment program.
On March 3, 2014 — a month after he secured Kittitian citizenship — Ver provided the U.S. Consulate in Barbados with a signed Form DS-4079 (“Request for a Determination of Possible Loss of Citizenship”). The form included a signed Statement of Voluntary Relinquishment of U.S. Citizenship. The U.S. Department of State later issued him a Form DS-4083 (“Certificate of Loss of Nationality”), establishing that Ver had expatriated as of February 4, 2014, marking the date he acquired Kittitian citizenship.
Strictly speaking, the expatriation date acknowledged by the State Department is not dispositive for federal tax purposes. Under the tax code, there are four trigger events for determining the expatriation date for purposes of the exit tax. In Ver’s case, the earliest of these events was his presentation of Form DS-4079 to the U.S. Consulate in Barbados, which occurred on March 3, 2014. That fixed the date for the constructive sale of his assets as March 2, 2014. Unfortunately, Ver’s law firm incorrectly advised him that the constructive sale occurred on February 3, 2014.
You’re not alone if you find it confusing that the State Department’s date of expatriation does not match the recognized expatriation date for federal tax purposes. The difference of a single month doesn’t seem like much, but in the world of fluctuating cryptocurrency prices it can amount to significant variances in valuation. Frustrating as it was, the timing snafu was not the worst of Ver’s tax problems.
Relying on a technique known as clustering analysis, the IRS claimed that Ver owned 131,000 bitcoin units as of his expatriation; of those, 73,000 were held through his companies. That’s a lot of wealth. Bitcoin was then trading around $871 per unit (nowhere near its peak value), making Ver’s holdings worth approximately $114 million at the time. Bear in mind that Ver had acquired his stash years earlier, at much lower prices. He acquired many of his units during a period when the price did not exceed $32. Under any timing scenario, Ver was looking at massive exposure under the exit tax.
Ecce Crypto
The June 2023 indictment alleges that Ver engaged in a scheme to defraud the U.S. government, beginning as early as 2012, which corresponds to the time when he began planning his expatriation. For the most part, the scheme involved not accurately communicating the full extent of his wealth to his various advisors, including the law firm and his appraisers.
For instance, in early 2014 his law firm was attempting to calculate Ver’s exit tax liability for the purpose of making a series of estimated tax payments. It developed a spreadsheet of Ver’s assets to assist with that effort. However, the spreadsheet supporting the calculation failed to list the number of bitcoin units he owned. Instead, it listed the estimated value of his bitcoin holdings ($3 million), as provided by Ver himself. Had the lawyers been informed of how many units he owned on a particular date, they could have easily been able to calculate their market value. No estimated tax was paid for 2014.
In 2015 the law firm again pressed Ver to disclose both the number of bitcoin units he owned as of the expatriation date, and the price he paid for them. He allegedly declined to provide a specific response. Months later, the law firm got back to Ver after conducting their own market analysis. The lawyers proposed using a unit price of $800 to calculate his exit tax liability. Ver flatly rejected the figure as unacceptable. The apparent basis for his objection was that, if he had actually liquidated his entire bitcoin holdings on a single day in early 2014, the action would have crashed the global bitcoin market — so large was his stash. Accordingly, some kind of volume discount should have been permitted. Obviously, a constructive sale cannot crash a market. There’s nothing in the statute or regulations that envisions this kind of discount. It isn’t a principled objection, really. I suspect what happened was that Ver crunched the numbers, assuming a constructive sale at $800 per unit, and didn’t like the result.
The indictment hints at an awkward tension between attorney and client, in which Ver would repeatedly decline to provide the law firm with details about the specific number of bitcoin units he owned as of the expatriation date. It portrays a back-and-forth in which the firm informs Ver that he is required, by law, to use the $800 unit price to calculate his exit tax, to which Ver replies that the proposed price is “impossible and unreasonable.”
It also appears that the law firm, a year earlier, had advised Ver against obtaining foreign citizenship in the manner that he did. That is, taking an irreversible step toward expatriation and then (after the fact) being left to worry about the exit tax when it’s too late to adjust the composition of one’s personal assets. That sounds very much like the law firm was pushing him to shed assets before expatriation, rather than conceal assets after. At one point, one of his lawyers told Ver his chosen approach was akin to “diving off the high dive into the pool without checking how much water was in the pool.”
Through the indictment, we get a glimpse into Ver’s presumptive tax strategy:
Lawyer 1 also asked defendant VER about his personal bitcoin holdings, specifically about how he had come to own bitcoins through bitcoinstore.com. Defendant VER responded that MemoryDealers “kept as many of the bitcoins as possible.” . . . In response to Lawyer 1’s follow-up questions, defendant VER remarked that bitcoin wallets “were not registered to any name or associated with a tax ID, and that no one, including the IRS, can freeze ones [sic] bitcoin accounts or seize ones [sic] bitcoins.” . . . Defendant VER stated that he believed a “smart tax strategy would be for [the bitcoins] to have been transferred to [his] personal ownership whenever it would have been cheapest to have done so from a tax perspective.”
The apparent thinking was to conceal as many units as possible in trading accounts or bitcoin wallets associated with Ver’s businesses. Because those holdings were not associated with his name or taxpayer identification number, Ver believed they should pass undetected for exit tax purposes. If the global market for bitcoin were to collapse — always a possibility — Ver would then arrange for the units held by his businesses to be conveyed to his personal trading accounts. Effectively, that’s selling bitcoin to himself at a deflated price.
In theory, the approach could minimize any subsequent taxable gains to the businesses, which remain subject to U.S. income tax as domestic (California) businesses. The businesses were initially set up as S corporations but converted to C corporations by operation of law when Ver gave up his U.S. citizenship.
Does the scheme successfully reduce exit taxes? Well, that depends on the accepted valuation of Ver’s businesses. If the appraisal conveniently overlooked their hoard of amassed bitcoin, then sure, the valuation might come back extremely low. If, however, the appraisal fully accounted for the companies’ extensive bitcoin holdings, then the strategy seems to have accomplished very little.
To that end, Ver’s original appraiser (who was affiliated with a major accounting firm) had prepared draft valuations of his two businesses. Ver replaced him in 2015 for reasons that aren’t clear. Another protracted back-and-forth followed between Ver, his lawyers, and the new appraiser. By 2016, Ver was considering a further scheme in which a portion of his bitcoin would be gifted to his girlfriend, who lived in Japan:
Defendant VER further stated, “perhaps it will be easier for tax reporting requirements if I gave all my bitcoins to my partner (not legally married wife) in Japan?”
The exit tax anticipates such maneuvers. It reaches certain gratuitous conveyances made in advance of expatriation. The proposed workaround was to backdate the supposed gift. Consistent with that plot twist, Ver caused the law firm to prepare and file a Form 709 (“U.S. Gift and Generation-Skipping Transfer Tax Return”). It claimed that he had gifted 25,000 bitcoin units to his Japanese girlfriend years earlier in 2011.
Shortly thereafter, Ver caused the law firm to prepare and file Forms 1040NR. The return failed to report any taxable gain from the constructive sale of bitcoin units he held personally and substantially underreported the taxable gain resulting from the constructive sale of his businesses.
Ver also caused the law firm to prepare and file a Form 8854 which similarly omitted his personal bitcoin holdings and underreported the value of his businesses. The form valued Memorydealers at $2.25 million and Agilestar at $4.31 million. The government alleges that Ver knew the companies were worth far more than the stated amounts because of their extensive bitcoin holdings. Ver estimated his personal net worth at $18.6 million. The government alleges that Ver knew his net worth was significantly greater than that figure. Ver signed each of these forms under penalty of perjury.
It didn’t stop there. In 2017, Ver allegedly arranged for his two companies to transfer their combined bitcoin holdings (about 70,000 units) to his personal trading accounts. He then sold them for approximately $240 million, depositing the proceeds in various bank accounts he controlled in the Bahamas. None of that income was reported on his Form 1040NR for 2017. Because the transfer and sale occurred well after Ver had renounced his U.S. citizenship, he mistakenly thought he was off the hook. When asked by his tax return preparer whether he received any distributions of cash or property from his two companies, Ver allegedly responded that he did not.
The indictment alleges that Ver caused a loss to the IRS of at least $48 million, resulting from the concealment of assets and income perpetrated on a grand scale over several years. So much for rendering things unto Caesar.
Amen to That
Here’s a useful trick for highly affluent readers who are desperate to avoid the exit tax: Live wherever you want, but don’t renounce citizenship. The constructive sale of assets and resulting taxable gains probably aren’t worth the trouble.
Above all, do not paint yourself into a corner by renouncing your citizenship and then calculating what your exit tax will be. The benefit of performing the calculation first is that it can influence your decision as to whether renunciation is worth it.
Sure, retaining citizenship means that you’ll remain subject to U.S. income taxes and the burden of filing an annual return — together with nontrivial reporting burdens such as the Foreign Account Tax Compliance Act and foreign bank account reporting regimes. That’s a major frustration when you consider that the rest of the world adheres to residence-based taxation and seems to be doing just fine with that policy.
But if you’re fortunate enough to rank among the very wealthy, as is the case with Ver, those inconveniences will hardly matter. The indictment suggests that Ver’s net worth was at least $114 million a decade ago, when bitcoin was trading around $871. Just imagine what he’s worth now, given current market conditions. It would be strange to have that much wealth, and not be able to enjoy it because there’s a criminal indictment and an extradition request hanging over your head.
Read the full article here
